A franchise can be the best of both worlds. When you become a franchisee, you get to launch and own your small business without having to create one from the ground up. A franchise means buying into a proven business model, one with a market-tested product, branding and an established customer base. When it works, this can be a great way to become your own boss and stay that way. So how to buy a franchise? Here are seven steps that can take you from eating Big Macs to selling them.
A financial advisor can help you put a financial plan together to reach your franchise needs and goals.
Step One: Examine Your Own Viability
While buying a franchise lets you share in the company’s success, the company will want to make sure you’re a viable partner as well. Specific franchise requirements will vary, but you should be prepared to review factors such as your:
Liquidity, in particular, will matter because buying a franchise costs thousands of dollars.
Before you begin seriously shopping for a franchise, make sure that these vital statistics all look good. If you’re sitting on a 580 credit score, maybe let that rehabilitate for a while before you try to buy into the Wendy’s kingdom.
Step Two: Research Available Franchises
It’s important to do your research to find a franchise that’s right for you. There are a number of websites, like Franchise Gator or Entrepreneur, that you can use to research available franchise opportunities near you.
Not every company will offer local opportunities. Look up the options where you want to build your business and then settle in for the real research. Your goal here is to narrow down the options to just one or two possibilities. Picking the right one or two can make all the difference between success and failure.
Here are seven issues you should consider:
- Market saturation: How common is this franchise in your area? And is that a bad thing? Do you want to risk competing against your own brand, or does a heavy presence mean that people like what this company has to offer?
- Success rates: Have many of these franchises closed, either locally or nationally?
- Overall company health: What is the company’s stock price? How does the brand hold up? Generally speaking, will you be buying into a strong company?
- Franchise survival rate: What percent of the company’s franchises survive past five years in operation?
- Buzz: What are other franchisees for this brand saying? Whether online or in person, what do people have to say about owning this business? Don’t be afraid to cold call and offer someone a cup of coffee in exchange for a few minutes of their time.
- Costs: How expensive will it be to open this business?
- Interest: Are you interested in this business and brand? However successful it may be, you don’t want to trap yourself in a business that you have no interest in running.
Finally, look at your USP, or unique selling proposition. In simple terms, what makes this business stand out? What will make people drive to your gym or doughnut shop over any others? It might be the location that you’ve got your eye on, or it might be a gap you’ve identified in the market. Whatever it is, be ready to explain to yourself and to anyone else why this will work.
By the time you’ve considered these issues (and more), you should have narrowed your list down to the one or two businesses you’d really like to run.
Step Three: Contact the Franchise You’re Interested In
Reach out to the franchise you’ve selected to apply for the business. You will typically do this through the company’s website, although the websites we noted above will also help you find the contact information for each given franchise.
First, this will involve an application and questionnaire. If you have not written a formal business plan for your franchise yet, do so now. It will be an important part of the application process and will demonstrate to the franchise that you have carefully thought through this opportunity.
This initial application will differ from company to company, but it will typically include questions about your work history, plans for your franchise and your personal finances. It may ask you to provide proof of finances, such as bank statements and deeds. Answer these questions thoroughly.
If the franchise is interested, it will provide a franchise disclosure document (FDD), previously called a uniform franchise offering circular (UFOC). This document lays out the details of your costs and responsibilities as a franchisee. It also gives you critical data about the health of this company. Read this document carefully. Pay particular attention to information such as:
- Franchisee duties and obligations. You don’t want to have your future franchise revoked because you accidentally broke an element of the contract.
- Annual revenues. Take a look at revenues across the company and annual growth.
- Percentage figures on franchise turnover. We noted this above as the survival rate. The FDD will have more details on this.
- Royalties paid to the franchiser. Know how much of your income will go to the head office.
- General overhead. These are costs that you will be expected to pay, such as advertisement, equipment, software and administrative services.
- Detailed up-front cost information. This is a breakdown of how much it will cost you to open this business.
- Exclusivity and competitors. Consider whether you will have exclusivity of a certain area or will have to compete with other stores within the same franchise.
Step Four: Make an Informed Decision
Again, the details on this step will vary across companies. However, once you have been sent a copy of the FDD, typically the franchiser will want to meet you. Sometimes this will happen in personal meetings. Other times the company will host discovery days, which are group events during which franchisers and franchisees can meet.
During this process you will get a chance to meet the corporate staff and decide if this is a good personal and cultural fit for you. They’ll do the same thing, and may ask for further application paperwork before or during the meeting. Think of this like a job interview on both sides. If it goes well, you will get your legal documents.
Step Five: Review the Franchise Agreement Carefully
If the company sees you as a good fit, it will provide the franchise agreement. This is the formal contract that gives you the right to open up a business in the company’s name.
You should do two things with the franchise agreement:
- First, read it carefully. Make sure this document contains everything you want. Also check for everything that you discussed with the franchiser in person. If they made any promises to you, make sure that the franchise agreement reflects those promises in writing.
- Second, have a lawyer review your agreement. This step will cost money, there’s no getting around that. But this is your business we’re talking about. Spend the money it takes to have this contract reviewed and explained to you by an attorney experienced at dealing with franchise agreements. It might save you heartbreak (and tens of thousands of dollars) down the road.
Then, if everything looks good, go ahead and sign.
Step Six: Secure Financing
While the franchise will expect you to put up your own money, the truth is that most people can’t afford the full costs of opening a franchise by themselves. This can cost hundreds of thousands of dollars, depending on the business you’d like to open, and not many people have that kind of cash on hand.
Your most likely sources of funding are small business loans through a bank or with assistance from the Small Business Administration. To get this funding you will need to have all of your paperwork in order. This will include:
- A thorough business plan that carefully reviews costs, liabilities and anticipated revenues.
- Based on that business plan, a projection for paying off your loan.
- Personal financial records.
- Detailed records of your franchise, including the franchise agreement and the FDD.
You may also want to consider individually financing pieces of your business if startup will involve capital assets. If you need to buy vehicles or any buildings, you want to handle those through loans secured against the asset.
Step Seven: Choose a Location and Begin
With the contracts signed and financing secured, you are ready to start your business. Now it’s time to begin shopping for a lease, looking for staff and buying equipment. Good luck!
Buying a franchise can be a great way to become your own boss. If you are thinking about buying one, make sure you consider your viability, research the franchise that you intend to buy thoroughly, review your franchise agreement carefully, secure financing and choose a location.
Tips for Becoming a Small Business Owner
- A financial advisor can help you create a financial plan for your business. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You’ll have new taxes to pay once you become a business owner. To make sure you’re prepared for tax season, stay organized as you go rather than scrambling to find documents at the last minute. It also may be a good idea to sit down with a tax professional at the outset so you know know what to expect.
Photo credit: ©iStock.com/TennesseePhotographer, ©iStock.com/PeopleImages, ©iStock.com/PeopleImages